Power Hour: Which is a Better Investment: The Stock Market or Farmland?

Hot money keeps hunting farmland.

It’s as good – if not better -- than gold. Investors ranging from Wall Street securities brokers to affluent retirees continue to seek farmland as a good long-term bet, with more out-of-state investors vying for farmland, according to auctioneers, land brokers and assessors.

Now, even some of the world’s biggest pension funds say they are dumping money into farmland as they seek to diversify portfolios. At an ag investment summit in London this summer, leading U.S. and EU pension funds are looking for the only tangible asset they can find to avoid the volatility in world economies. In 2011 pension funds invested $5 billion to $15 billion globally in farmland, according to Grain, a non-governmental organization that promotes sustainable use of resources. It predicted the figure would double by 2015, reports Reuters.

Over the past decade, U.S. farmland has returned an average of 15.5% a year, notes the National Council of Real Estate Investment Fiduciaries. That compares with about 4.1% for the Standard & Poor's 500 stock index and about 1.8% for 90-day government bonds. Gold is returning about 19%.

Iowa farmland values have shown yearly increases for 11 of the past 12 years, says Mike Duffy, ag economist and land specialist with Iowa State University. The values remain at record high levels where they have been for the past nine years. Based on the Iowa State University Farmland Value Survey, the 2011 estimated average farmland value in Iowa was $6,708 per acre. This was an increase of 32.5% from the 2010 estimate.

In 2011, Iowa land values set two more records previously set in the 1970s, Duffy says. The 32.5% increase is the largest yearly percentage increase for Iowa land values.

By comparison, the composite value of the stock market, as measured by the Standard & Poor’s Index average, has started recovering from the disastrous 2008 year. The S&P lost 34% of its value between 2000 and 2008, but its overall record has been impressive since 1990, Duffy notes. Stock values rose from 328.75 in 1990 to a December 2011 close of 1,255.20, an increase of nearly 300 percent in spite of the decline in 2008.

Better or worse? So which is a better investment – land or the stock market?

"It is a complicated question and one for which there is no one best answer," offers Duffy. Several factors need to be considered when trying to answer this question and several assumptions have to be made.

In simple terms, real estate taxes, a management fee, insurance and maintenance must be subtracted from the return to land; but there would be other costs that would vary with the individual circumstances, he says, including transaction costs.

Investors also have to keep in mind that land is on a roll, while the performance of the stock market for the next few years is also not clear. The U.S. stock market will be impacted by what happens in the European Union and China, as well as other places in the world. "We are no longer insulated from the economic conditions throughout the world," reminds Duffy.

Another uncertainty in the land market is the changing landowner demographics. In 1982, 12% of the farmland in Iowa was owned by someone older than 75. By 2007, this percentage had more than doubled to 28%. In 2007, over half, 55%, of the farmland in Iowa was owned by someone over the age of 65.

"Whether they will they want to continue to own the land or sell it is unknown. Too much land being offered for sale is not a problem at this time, but it could become one if the next generation doesn’t want to hold on to the land," he says.

The reality is that land and the stock market are different types of invest¬ments and assets, Duffy says. "There are a number of individual stocks that perform better than the S&P, but there are some that don’t perform as well," he adds. "Anyone contemplating which is a better investment needs to know their goals."

Land’s performance relative to the stock market over the past few years has been spectacular. Will this trend continue? Time will tell. Which is the better investment? As the old saying goes, timing is everything.

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Anonymous8/16/2012 07:02 AM

Apples & Oranges. What is 'long term'? Are we talking total portfolio, all in one or the other? Is the farmland making income used for living expenses or strickly an investment? Too many questions unanswered to make a judgement.